Deutsche Telekom is pushing for a US$1bn-plus break-up fee to be included in any deal with Sprint Corp to sell its American unit T-Mobile US. The German incumbent is said to be worried that a merger could be spiked by regulators. It also wants…
Deutsche Telekom is pushing for a US$1bn-plus break-up fee to be included in any deal with Sprint Corp to sell its American unit T-Mobile US.
The German incumbent is said to be worried that a merger could be spiked by regulators. It also wants assurances that some of T-Mobile’s management would be retained, and that the brand would continue, to protect its operator should a deal be blocked.
The points are being worked through as the telcos look to secure a deal in the near-term, people familiar with the matter told The Wall Street Journal.
However, the companies are said to be mindful that the regulatory pathway to closing a deal may be clearer after next year’s 600 MHz auction or after 2016, when a different presidential administration will be in place.
In spite of this, DT and Softbank-owned Sprint are reported to be worried that waiting will mean AT&T and Verizon Wireless strengthen their already powerful positions in the market. Together the two giants boast around two-thirds of the US’ wireless subscribers – roughly 233 million. Meanwhile, Sprint and T-Mobile – the third and fourth players in the market – have 54 million and 49 million respectively.
Sprint has already held discussion with banks to arrange debt financing to fund a deal should it decide to pursue a transaction. Earlier this year Sprint’s CFO and its treasurer reportedly met with bankers from Goldman Sachs, Citigroup, JP Morgan, Mizuho, BofA Merrill Lynch and Deutsche Bank to work out how much it should borrow. A figure of US$20bn has been reported. T-Mobile US has a market capitalisation of US$25.6bn and generated US$5.3bn in EBITDA last year.
Noises coming from the regulators so far have suggested that a Sprint/T-Mobile tie-up would be greeted with scepticism. Speaking on a conference call last week DT CEO Timotheus Hoettges said he was open to the Sprint deal to create a “super maverick” in the US market, but warned that regulators appeared wedded to a four-player market.
DT experienced the consequences of a merger falling foul of US regulators when its US$39bn sale of T-Mobile to AT&T was effectively blocked by the Department of Justice in 2011.
T-Mobile’s business suffered during and after that failed regulatory process, however it arguably emerged stronger due to the hefty break-up fee it had negotiated. AT&T had to pay out US$3bn in cash to the German-owned operator and spectrum licences that have been valued at US$4bn.
Softbank’s CEO, Masayoshi Son, was previously said to be wary of inserting a significant break-up fee into a deal. The head of the Japanese telco was reported to fear that including a significant figure could incentivise the regulators to block a deal in a bid to strengthen the fourth player.
Another factor in any deal will be the Federal Communication Commission’s (FCC) new proposed rules for a spectrum cap which are set to be announced later this week.
Reports suggest a portion of Sprint’s high-frequency spectrum will be included in its allowance for the first time, meaning the operator would have limited scope to acquire more airwaves. The new cap would give DT and Sprint an indication of what level of spectrum divestitures they would be required to offer regulators should they agree a merger. Analysts have suggested that the break-up fee for a deal could be made-up of Sprint’s 2.5 GHz spectrum.
Should the companies merge, T-Mobile’s nonconformist CEO John Legere is widely-tipped to head the beefed-up third player. Legere is credited with transforming T-Mobile into an effective challenger which has taken a significant number of subscribers from larger rivals through innovative pricing offers.
